Adding to the woes of the government, the inflation on Friday inched towards 12 per cent mark while the industrial growth nosedived to 3.8 per cent amid fears that RBI could take more price control steps that could make the borrowing further costlier.
The unabated rise in inflation is bound to impact the economic growth though it might not be severe, said Subhashish Gangopadhyay, adviser to Finance Minister P Chidambaram.
Reflecting the pressures on economy, industry grew by 3.8 per cent in May on the back of five per cent in April. The fall is sharper compared the level of over 10 per cent in the same period a year ago.
On the other hand, inflation continued to rise from its 13-year high to 11.89 per cent for the week ended June 28, data for which was released by the government on Friday.
Reacting sharply to weak indicators of economy, the stocks markets also plunged on Friday with the benchmark Sensex taking a hit of over 450 points.
RBI in its quarterly review in the last week of July may revise the interest rates upward making industrial borrowings costlier which could affect economic activity.
The government, however, was quick to point out that prices of essential commodities which include foodgrains, pulses, edible oils, vegetables, dairy products and others, have more or less stabilised.
According to the data, inflation rose on account of rising prices of coconut oil that soared by 11 per cent, mustard oil by five per cent, soya oil by four per cent, while fruits and vegetable, pulses, jowar and barley increased by one per cent each.
Despite attempts made by the government to tame price rise, items like cement increased by over one per cent and edible oils by two per cent. The crucial segments of industry -- manufacturing and electricity generation -- performed badly with rising interest rates hitting their growth.
Manufacturing grew by a modest 3.9 per cent in May against 11.3 per cent a year-ago. However, consumer durables came out from negative growth to show 4.4 per cent rise against a fall of 0.7 per cent in May 2007.
Growth in electricity generation, a key resource for the economy, plunged to 2 per cent from 9.4 per cent.
However, mining output showed an upward trend, growing by 5.2 per cent in May against 3.8 per cent a year-ago.
"I think the downtrend will continue because of overall contraction in economy. Toplines are coming down because of higher interest rates and credit squeeze, while bottom lines are coming down because of higher wages," ICRIER Director Rajiv Kumar said.
While RBI is expected to harden its stance on monetary policy to tame inflation, growth may be a casualty.
Strengthening fears of tigther money supply, global investment banking major Goldman Sachs said, "Monetary policy will continue to have a tightening bias, in our view."
Financial Services major Citigroup also said in its latest analysis for India that 'the days of nine per cent plus growth are over and we believe that India has lost the opportunity to sustain those levels for now, and we expect growth to come in around 7 per cent plus levels in fiscal 2009-10'.
The finance ministry is already expecting economic growth to moderate to 8-8.5 per cent this fiscal from nine per cent in 2008-09.
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